CEO Succession Practices in the S&P 500

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2018 Edition, an annual benchmarking report authored by Dr. Tonello and Gary Larkin of The Conference Board with Professor Jason Schloetzer of the McDonough School of Business at Georgetown University, and made possible by a research grant from executive search firm Heidrick & Struggles.

According to a new report by The Conference Board, the exceptional longevity of the bull market that followed the Great Recession appears to have stretched leadership tenures at large U.S. public companies, resulting in a higher average CEO age. The study, CEO Succession Practices: 2018 Edition, annually documents and analyzes chief executive officer succession events of S&P 500 companies, updating a historical database first introduced in 2000. In 2017, there were 54 CEO successions among S&P 500 companies.

In 2009, at the peak of the Great Recession, the typical CEO of an S&P 500 held his or her position for 7.2 years—the shortest average tenure ever reported by The Conference Board. However, CEO tenure started to rebound soon after, rising to 10.8 years by 2015; in 2017, departing CEO tenure was the highest recorded since 2002, at nearly 11 years. (In contrast, employee tenure across the broader labor market has remained relatively constant over the past 30 years, at about five years). Consistent with this evidence, in 2017 the average age of a sitting S&P 500 CEO was 58.3 years, or more than two years older than the average CEO in 2009.

These findings on CEO tenure may foreshadow a new generational change at large U.S. public companies, as the percentage of S&P 500 CEOs who are reaching retirement age (i.e. age 64 or older) in 2017 was also the highest on record (nearly 17 percent of sitting CEOs, the highest rate since The Conference Board began tracking succession events). Empirical research has consistently revealed a correlation between CEO succession and firm performance. An aging CEO population is expected to lead to increased leadership turnover, and this phenomenon could rapidly accelerate if the market starts to slow down or reverses its course in the next couple of years. Boards of directors should therefore be aware of the possible surge in the demand for top talent and have a sound CEO succession plan in place to retain a competitive advantage over their peers.

A related finding from the research study is the dramatic widening of the gap between CEO exits from better-performing companies and under-performing ones. The succession rate of better-performing companies declined to 6.8 percent in 2017, the lowest since 2002 and much lower than the average of 9.4 percent calculated for the entire 2001-2017 period. By way of comparison, in 2017 the succession rate from better performing companies was more than three times lower than the 22.1 percent registered for underperforming companies. The finding likely reflects the pressure that new regulations and shareholders are putting on listed companies to introduce more rigorous metrics of long-term financial performance and ensure the alignment of CEO compensation with such measurable results. In today’s governance and investment climate, CEOs who achieve better performance benefit from even greater job stability while underperforming CEOs are even more exposed to public scrutiny. Such scrutiny may ultimately limit the discretion that the board of directors can exercise to keep the underperformer.

Other key findings in the report include:

  • Today’s incoming CEOs are in the early to mid-fifties, and the appointment of executives aged 60 or older has become quite uncommon. In 2017, out of 54 newly announced CEOs in the S&P 500, only four were in their 60s and two in their 70s. In the same time period, there were 10 appointments of CEOs in their 40s and 26 new CEOs in the 50-55 age group. Among S&P 500 companies, only 10 CEOs. are aged 73 or older, and nearly all of these individuals have led their companies for decades: They include Warren Buffett (who is 87 years old) of Berkshire Hathaway, Leslie H. Wexner (80) of fashion retailer L Brands Inc., and Fred Smith (74) of FedEx.
  • Amid shifting consumer demand and the steady decline of the department store model, the retail and wholesale trade sector had the highest rate of CEO succession. In 2017, among S&P 500 companies, the CEO succession rate was 10.8 percent, in line with a historical average of 10.9. However, the industry analysis shows that, among retail and wholesale trade companies included in the index, the CEO succession rate was more than twice as high, at 22.7 percent. Similarly, the trade sector reported, by far, the highest percentage of disciplinary successions, or 38.5. The same analysis showed that the rate of CEO succession among S&P 500 manufacturing companies almost doubled, from 7.9 percent in 2016 to 14 percent in 2017. The explanation for these findings should be sought in the concerns about the underperformance of manufacturing stocks in the 2015-2016 period (where the US Institute for Supply Management’s Purchasing Managers Index dropped more than 10 points in less than a year, from a peak of 59 in 2015 to 47 in 2016, or the sharpest decline since 2008) as well as the aptly named “retailpocalypse” that has been affecting department stores and other trade businesses besieged by the Amazon behemoth. Retail and manufacturing companies that announced a CEO succession in 2017 included Macy’s, Kohl’s, and GE, which exemplify an old economy now supplanted by new business models. At Tiffany, the abrupt resignation of CEO Frederic Cumenal (which was followed by the departure of the company’s top designer) was the latest example of a shake-up among luxury product businesses, which are grappling with a swift change in the taste and spending habits of new generations of consumers.
  • Embattled by disrupting competition and changes in the consumer market, in 2017 many boards of directors trusted an outsider to deliver organizational shake-ups and a new strategic direction. An exceptionally high number of companies that changed their CEO in 2017 chose to appoint an outsider to the top leadership role. These findings represent a clear break from the past, as the 14.3 percent rate of outside successions documented for 2015 and 2016 surged to 44.4 percent in 2017. The remaining 55.6 percent were “insiders,” having served more than one year with the company. A look at the list of outside CEO appointments for the year reveals a common trait. Many of those companies are in embattled business sectors, such as manufacturing and retail—penalized over the years by outsourcing practices, innovative technology, and disruptive competition. Some have underperformed their peers, failing to intercept shifting consumers’ needs. Others have struggled to innovate and remain relevant. In these circumstances, boards of directors executing their responsibility of delivering shareholder value, often choose to bring in outside talent groomed in a different business culture to help to navigate sharp strategic corrections or accelerate organizational changes. Examples include H&R Block, Tiffany & Co, Mattel, Kellogg, and Chipotle Mexican Grill.
  • Whether to audition or groom the new leader or to manage a lengthier transition, the board chose to appoint an interim CEO in almost 2 out of 10 CEO successions in 2017. Gradual transitions have become more common, and so has the option to appoint interim CEOs. While in each of the last two years, approximately 10 percent of CEO succession events involved an interim appointment, the rate increased to 18.5 percent in 2017. This has happened, for example, at CSX Corp in response to the sudden death of its CEO; at Equifax in the wake of its major cybersecurity breach; and at Autodesk after a period of having two co-interim CEOs. In these and other cases, the length of service for interim CEOs ranged from less than one month to eight months, with four boards ultimately offering the permanent position to the executive serving in the interim. Previously used mainly in situations of emergency, the practice no longer necessarily reveals shortcomings in the planning process or the need to indefinitely prolong the search for a successor. Instead, it can be implemented for a variety of reasons: to audition the person who is already expected to become permanent CEO; for the interim to groom the eventual candidate to the position; or to better manage the public relations aspects of a lengthier leadership transition.
  • While gender diversity continues to be elusive at the helm of the largest US public companies, the number of CEO positions held by women in the S&P 500 in 2017 rises to the highest level recorded by The Conference Board. Seven female CEOs left the S&P 500 in 2017: They are Meg Whitman of Hewlett Packard Enterprise, Irene Rosenfeld of Mendelez, Ursula Burns of Xerox, Marissa Mayer of Yahoo!, Gracia Martore of Tegna Inc., Debra Crew of Reynolds American, and Shira Goodman of Staples (Goodman in fact stepped down in early 2018, but Staples was dropped from the index in 2017, together with Yahoo!, Tegna, and Reynolds American). These departures were countered by eight new additions: seven newly appointed female CEOs (Adena Friedman of Nasdaq, Gail Boudreaux of Anthem Inc., Michele Buck of Hershey, Michelle Gass of Kohl’s, Margaret Georgiadis of Mattel, Geisha Williams of PG&E, and Virginia Drosos of Signet Jewelers) and the addition to the S&P 500 of Advanced Micro Devices, which is led by CEO Lisa Su. As a result, the total number of S&P 500 companies with a female chief executive rose to 27 in 2017, from the 26 seen in 2016. It is the highest level ever recorded by The Conference Board in its 17 years review of CEO succession practices. However, it also underscores the degree to which gender parity remains elusive in corporate leadership: if the rate of increase in female representation in the CEO community were to continue at the 2001-2017 level, there would still be fewer than 100 women CEOs of S&P 500 companies in 2034.
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